A recent settlement between the US Department of Labor and First Republic Bank aptly illustrates the perils of misclassifying large numbers of employees under the overtime laws.

Following a DOL Investigation, First Republic agreed to pay just over $1 million to nearly 400 of the Bank’s employees in 5 states (approximately 25% of the total number of employees First Republic has in those 5 states) including New York and Connecticut. The Bank treated these employees as exempt from the overtime pay regulations and did not pay them time and a half their regular hourly rate when they worked over 40 hours in a workweek. Operating under the assumption that the employees were exempt, the Bank also did not track their work hours, thereby violating the FLSA’s recordkeeping requirements. The misclassified employees were also paid bonuses which the DOL determined should have been factored into the employees’ regular hourly rates thereby increasing the amount of overtime pay the incorrectly classified employees were found to be owed.

The root problem in this situation was the bank’s failure to carefully analyze these employees’ job duties in making an informed assessment of their status under the overtime laws. According to Secretary of Labor Hilda Solis, “It is essential that employers take the time to carefully assess the FLSA classification of their workforce. As this investigation demonstrates, improper classification results in improper wages and causes workers real economic harm.” Large and medium-sizes businesses in particular would be wise to heed the Secretary of Labor’s admonition.

The U.S. Department of Labor (DOL) announced on May 1, 2012, that in accordance with a settlement agreement, Wal-Mart Stores Inc. has agreed to pay $4,828,442.00 in back wages and damagesto more than 4,500 employees nationwide and $463,815.00 in civil money penalties for misclassifying employees and associated violations of the overtime provisions of the Fair Labor Standards Act (FLSA), the federal wage and hour law.

According to the DOL, 4,500 vision center managers and asset protection coordinators at Wal-Mart Supercenters, Wal-Mart Discount Stores, Neighborhood Markets and Sam’s Club Warehouses were not paid proper overtime wages for hours worked beyond 40 in a work week. Apparently, the workers had been improperly classified as exemptfrom the FLSA’s overtime provisions.
According to Secretary of Labor Hilda L. Solis, "[m]isclassification of employees as exempt from FLSA coverage is a costly problem with adverse consequences for employees and corporations." Secretary Solis warned: "Let this be a signal to other companies that when violations are found, the Labor Department will take appropriate action to ensure that workers receive the wages they have earned."

Wal-Mart agreed to pay back wagesowed in the amount determined by DOL plus an equal amount in liquidated damages, as required by law. In 2007, Wal-Mart, which operates more than 3,900 establishments in the United States, had corrected its classification practices for these workers, and negotiations over the back pay issues have been continuing since then.

As per Secretary Solis’s warning, to avoid any potential ramifications, employers should make sure to properly classify their employees to avoid violating the overtime provisions of the FLSA.

Given the estimated tens of thousands of employers that misclassify their employees as independent contractors, on April 22, 2010, an Ohio senator introduced The Employee Misclassification Prevention Act to provide workers with benefits they are not entitled to as independent contractors. Only those classified as employees are entitled to the protections of wage and hour laws, employment discrimination laws, and unemployment and workers’ compensation insurance. This federal legislation would amend the Fair Labor Standards Act and permit penalties for improperly labeling workers as contractors.

As noted in a statement by Secretary of Labor Hilda Solis, the new bill would provide workers with the “critical workplace protections and employment benefits to which they are legally entitled.” The focus on proper classification is also recognized as a revenue-generating measure for the government. (“It is estimated that Ohio loses at least $160 million a year . . . from worker misclassification.”)

While the bill may provide some clarity in this area, currently different agencies apply different tests to determine whether a person is an employee or an independent contractor. The Department of Labor applies a seven-point test, while the IRS applies a slightly different test. Indeed, we recently wrote about stepped-up IRS enforcement of misclassification of independent contractors.

The point is that someone providing services for your company is not an independent contractor just because you and the individual agree to that status. The bookkeeper that comes in one day a week may well be a part-time employee. It depends on the nature of your relationship, the amount of control you impose, and a myriad of other factors. Given the increased legislation on both the state and federal levels in this area, it would be prudent to ensure that those who provide services for your company are properly classified.

Serving the Labor and Employment Law Needs of the Business Community At Greenwald Doherty, we enable clients to successfully resolve labor and employment issues and promote productive workplace relationships. In addition to a strong litigation practice, Greenwald Doherty offers consulting...More...